BILL ANALYSIS                                                                                                                                                                                                    




               CONFERENCE REPORT COMMITTEE ANALYSIS
                                                              
                                                        .

Bill No:  SB 1993
Author:   Calderon
RN:       9623214
Report date:   July 7, 1996
                                                              
                                                        .

 SUBJECT:   Earthquake Insurance

Were the Conference amendments heard (*) in committee?    
yes
If yes, were they defeated?   no

 SUMMARY: SB 1993 and AB 2086, which are odouble-joined,o  
and which contain separate but interdependent parts of a  
single Conference Committee product, would provide  
Legislative authorization for a California Earthquake  
Authority (CEA) to become operational and offer earthquake  
insurance. 

DIGEST:

Existing law 

1.oMandateso insurers which sell homeowners insurance to  
  ooffero policyholders the option of purchasing  
  oearthquake insurance,o which is otherwise excluded from  
  the homeowners policy.  This requirement applies to  
  policies sold to owners of single family residences,  
  mobile homes, and individual condominium units.

2.Eliminates, in the context of earthquake insurance only,  
  the doctrine of oconcurrent causationo (which requires  
  insurers to pay claims caused by multiple causes where at  
  least one cause is covered even though another cause  
  [e.g., earthquake] is excluded from the policy).

3.Provides for the California oFAIR Plano to issue obasic  
  property insuranceo to property owners who are unable to  
  purchase insurance through voluntary market mechanisms.

4.Allows insurers to comply with the omandate to offero  
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                                                     SB 1993
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  earthquake insurance (see #1) by selling a ono-frillso  
  policy which covers only the basic structure, with modest  
  contents and living expenses allowances.

5.Provides for a California Insurance Guarantee Association  
  (CIGA) which guarantees payment of policyholder claims if  
  their insurance company has become insolvent.

6.Conditionally establishes a California Earthquake  
  Authority (CEA), which would be a publicly-run earthquake  
  insurance company.  However, pursuant to AB 13 (the bill  
  enacted last year which adopted the CEA blueprint) the  
  CEA cannot issue policies unless the Legislature passes  
  an authorization bill.

7.Authorizes the Insurance Commissioner to seek to  
  establish the CEA, and to return to the Legislature to  
  seek authorization to commence issuance of insurance  
  policies by the CEA once specified conditions are met.   
  The conditions include obtaining:

  (a) commitments from 75% of the insurer market
  (b) commitments from reinsurers for up to $2 billion
  (c) IRS approval of tax-exempt status

The Proposed Conference Reports (treated here as a single  
  proposal):

1.Authorize the CEA to issue policies once the Insurance  
  Commissioner has certified that:
  
  (a) insurers representing 70% of the market have  
  committed to  
              participate 
  (b) reinsurance has been obtained in an amount at least  
  equal to $2 
             billion times the percentage of the market  
  which elects to 
             participate
  (c) the IRS has ruled the plan to be tax-exempt;

2.Make numerous substantive and technical changes to the  
  structure of the CEA as contained in AB 13.  The more  
  significant changes include:
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                                                     SB 1993
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a)A reduction (from 75% to 70% of the homeowners market) of  
  the number of insurers which must choose to participate  
  in the CEA in order for the program to commence.

b)A limitation on renewing debt which is re-paid by  
  policyholder surcharges.  AB 13 would allow debt up to $1  
  billion, but would allow additional assessments in the  
  future if part of the $1 billion were retired.  The total  
  aggregate amount would be limited for all time to $1  
  billion under this proposal.

c)An increase, from $100 million to $350 million in funds,  
  below which the CEA must call in contingent capital owed  
  by insurers.

d)The addition of condominium oloss assessmento coverage as  
  part of the CEAos basic coverage package, and the  
  potential increase (depending on fund growth), from $1500  
  to up to $3000, of coverage for additional living  
  expenses.

e)A shift, from the Insurance Commissioner to the Governor,  
  of the power to appoint most members of the CEAos  
  oadvisory panel.o

f)An extension of insurerso contingent capital obligation,  
  allowing for possible collection for up to 12 years (as  
  compared to 10 years under AB 13), but only after all  
  other sources of funding have been exhausted.

g)Repeal of the provision which declares the CEA to be an  
  insurer for purposes of the Insurance Code, and addition  
  of general language indicating that the CEA must abide by  
  the statutes, regulations, and common law rules which  
  apply to insurers when dealing with applicants and  
  policyholders.

h)Clarifying language to the effect that the basic  
  procedures of Proposition 103 will apply to ratemaking  
  and rule making functions of the CEA.

i)Language which narrows the scope of AB 13os broad  
  conflict of interest provisions so that regular CEA  
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                                                     SB 1993
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  employees do not experience bars to future employment  
  with employers who contract with the CEA.

j)Additional language deemed by the Treasurer to be  
  commercially necessary in order to successfully market  
  earthquake risk bonds to capital market purchasers, as  
  contemplated by the CEAos plan to obtain $1.5 billion of  
  capital market capacity.  

k)Additional language which renders all revenue of the CEA  
  dedicated to repayment of debt incurred to finance the $1  
  billion policyholder assessment layer, even if that means  
  that future claims are pro-rated.

l)Preferences for so-called osmall insurers.o  The  
  preferences are two-fold:  1) any insurer (regardless of  
  size) with less than 1.25% market share, or with less  
  than $1 billion of surplus, may join the CEA with a  
  5-year installment plan for its initial buy-in price; 2)  
  upon specified findings by the CEA Board concerning the  
  status of the market after 1 year of CEA operations, any  
  insurer could become an oassociateo participating insurer  
  and place new business only into the CEA.  Among various  
  conditions related to oassociateo status, the Board is  
  empowered to offer oincentiveso to induce participation,  
  and these incentives need not be available to all  
  insurers.

m)A requirement that any insurer which leaves the CEA after  
  policyholder surcharges have been imposed must surcharge  
  its earthquake policyholders an amount equal to what  
  would have been paid had the insurer remained a  
  participating insurer.

n)The addition of a CEA-specific warning notice to all  
  prospective policyholders.  The notice warns of the  
  potential for surcharges, pro-rata payments, and the lack  
  of CIGA protection.

Key differences between the Proposed Conference Reports,  
  and SB 1993, the CEA bill passed by the Senate:

1.Policyholder assessment layer returned to greater risk AB  
  13 level.  AB 13 placed CEA policyholders at risk for  
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  osurchargeso in the event losses exceeded available  
  capital, specified contingent capital obligations, and  
  reinsurance.  This risk was lower than capital market  
  investors and other specified insurer contingent capital  
  obligations.  SB 1993, at the request of Senator Lockyer,  
  placed policyholders at risk only after all other sources  
  of funding would be exhausted.  This proposal returns the  
  surcharge risk to policyholders to the AB 13 greater risk  
  level.

2.Insurer contingent capital obligations can still  
  orun-offo without actual reserves to backfill the loss of  
  capacity.  AB 13 provides that, subject to a specified  
  formula, the $3 billion (lower) layer of insurer  
  contingent capital goes away after 10 years, even if  
  there are no funds to fill in the gap.  SB 1993, at the  
  request of Senator Johnston, required that the full  
  insurer obligation remain for 10 years, and then it could  
  orun-offo only if there was actual cash reserves to make  
  up for the loss of capacity.  This proposal retains a  
  modified AB 13 formula.  Subject to the AB 13 10-year  
  formula, instead of having the contingent obligation  
  eliminated, it oruns upo to the top of the financing  
  structure.  Once on top, it becomes an obligation of last  
  resort and the obligation is entirely eliminated, whether  
  or not there is any cash reserves to backfill the loss,  
  at the 12-year mark.

3.oHomeownero policies cancelable to enforce policyholder  
  surcharge.  If a policyholder surcharge is imposed, AB 13  
  enforced collection of the surcharge by providing for  
  cancellation of both the earthquake and the underlying  
  homeowners policy in the event the policyholder failed to  
  pay the surcharge.  SB 1993, at the request of Senator  
  Peace, eliminated the potential that the underlying  
  homeowners policy could be canceled.  This proposal  
  reinstates the AB 13 approach which allows the  
  cancellation of homeowner policies.

By:  Insurance Committee; Mark Rakich

*See Senate Rule 29.6 (b) for definition of oheardo.

(Upon completion, delete all instructions typed in italics,  
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                                                     SB 1993
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file your analysis ASAP to SCIS laptops and notify the  
Office of Senate Floor Analyses at 445-6614)










































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SENATE RULES COMMITTEE                           SB 1993
Office of Senate Floor Analyses
1020 N Street, Suite 524
(916) 445-6614         Fax: (916) 327-4478
                                                              
                                                          .

                    CONFERENCE COMPLETED
                                                              
                                                          .

Bill No:  SB 1993
Author:   Calderon (D)
Amended:  Conference Report No. 1, 7/7/96
Vote:     21
                                                              
                                                             
  .

 PRIOR SENATE VOTES:  Not Relevant 

 CONFERENCE COMMITTEE VOTE:  5-1, 7/7/96
AYES:  Senators Calderon, Lewis; Assemblymembers Knowles,  
  Ducheny, Aguiar
NOES:  Senator Rosenthal

 ASSEMBLY FLOOR:  51-22, 4/22/96 - See last page for vote
                                                              
                                                          .

SUBJECT:    California Earthquake Authority

 SOURCE:     The author
                                                              
                                                          .

DIGEST:    This bill along with AB 2086 (Knowles) allows  
enactment of the California Earthquake Authority (CEA)  
created by AB 13.  The bill removes the mandate on  
homeowners insurers who elect to not join CEA to offer  
residential earthquake insurance.

 Conference Committee Amendments provide for the following:

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1. Remove the Senate language concerning elimination of the  
   requirement for insurers that do not participate in CEA  
   to offer earthquake coverage, as specified and  
   requirement that insurers participating in CEA continue  
   to be required to offer earthquake coverage.

2. Delete limited immunity given to CEA personnel which is  
   now to be contained in AB 2086 the companion measure.

3. Delete provisions concerning powers and duties of the  
   Insurance Commissioner to seek court orders to protect  
   the authority.

4. Require a specified disclosure to be provided to an  
   insured if earthquake coverage is provided by a policy  
   issued by CEA.

5. Change definition of basic residential earthquake  
   insurance.

6. Provide for CEA to issue loss assessment policies for  
   individual condominium units.

7. Limit operating expenses of CEA.

8. Make CEA subject to the Political Reform Act.

9. Delete existing provisions that would have provided for  
   the reduction and eventual elimination of assessments by  
   CEA of participating insurers, and instead provides for  
   the reallocation of the assessments, and the reduction  
   of the aggregate assessment to zero dollars in specified  
   circumstances after a specified period of time.

10.Make various changes in the financial structure and   
   recapitalization provisions of AB 13.

11.Increase reporting requirements to make CEA accountable.

12.Provide for a loan of $1.3 million to CEA from the  
   California Residential Recovery Fund, to be repaid with  
   interest, as specified.

13.This bill becomes operative only if AB 2086 (Knowles) is  
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   enacted.

 ANALYSIS:    Existing law, enacted by AB 13 (McDonald) of  
1995, establishes the California Earthquake Authority  
(CEA).  It authorized the Insurance Commissioner to take  
actions necessary to create CEA, but made CEA operational  
only upon subsequent legislative authorization.  Before it  
could be authorized, AB 13 required satisfaction of the  
following conditions:

--The Internal Revenue Service has granted the authority  
  tax-exempt status.

--75% of the residential insurance market have signed  
  letters of intent to join CEA and to make capital  
  contributions of not less than $750,000,000, and up to $1  
  Billion, to start up CEA.  (See Section 10089.15, on page  
  10 of AB 13.)

--The Commissioner has obtained firm reinsurance  
  commitments for not less than $1.5 billion dollars, and  
  up to $2 billion dollars.

In addition, AB 13 directed the Commissioner to seek  
contracts for the investment of private capital to increase  
the capacity of the fund, and to report back to the  
legislature by January 30, on the availability of and the  
terms and conditions for such investments.  He has reported  
that 1.5 billion can be raised from private capital.

As proposed in AB 13, CEA would have a ocapacityo of $10.5  
billion dollars upon its startup.  (This figure assumes  
100% participation by the insurance industry.  A lower  
percentage of participation will yield a proportionately  
lower startup capacity.  For purposes of consistency, this  
analysis will use numbers assuming 100% participation  
except as otherwise noted.

The $10.5 billion of capacity would be comprised as  
follows:

--The first billion would be contributed by participating  
  insurers.  This "seed money" will fund the operations of  
  CEA as premiums start to flow in.
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--The next three billion of capacity is garnered from a  
  contingent assessment upon participating insurers if an  
  earthquake event results in claims exceeding the  
  available capital of CEA.  This contingent liability may  
  be "rolled-off", beginning in year three, a dollar for  
  each dollar over $1 billion dollars in the available  
  capital of CEA.  A roll-off in any one year would be  
  limited to $450,000,000, 15% of aggregate liability.   
  However, at the end of ten years, this $3 billion  
  contingent liability is rolled-off entirely, regardless  
  of the available capital in CEA.

--The next two billion of capacity (from $4 billion to $6  
  billion) is provided by reinsurance contracts.

--The next one billion of capacity (from $6 billion to $7  
  billion) is provided by an assessment on CEA earthquake  
  insurance policyholders.

--The next $1.5 billion of capacity (from $7 billion to  
  $8.5 billion) is provided by the sale of private capital  
  market investment bonds.

--The final $2.0 billion of the so-called oCEA layer cakeo  
  is provided by an additional contingent assessment on  
  participating insurers.  This contingent assessment  
  liability may be rolled-off, a dollar for each dollar  
  over $6 billion dollars in the available capital of CEA.

AB 13 provides a "firewall" to insulate the state from  
lawsuits from policyholders who receive pro-rata payments  
from CEA in the event the authority lacks sufficient funds  
to pay all claims following an earthquake.

AB 13 also provides that if CEA becomes insolvent or ceases  
to operate, the residential property insurer's duty to  
offer earthquake insurance is renewed.

AB 13 passed the Senate 26-7, 9/15/95:

AYES:  Alquist, Ayala, Calderon, Campbell, Costa, Haynes,  
  Hughes, Hurtt, Johannessen, Johnson, Kelley, Killea,  
  Kopp, Leslie, Lewis, Maddy, Monteith, Mountjoy,  
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                                                     SB 1993
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  O'Connell, Peace, Rogers, Rosenthal, Russell, Thompson,  
  Watson, Wright
NOES:  Hayden, Johnston, Leonard, Lockyer, Marks, Mello,  
  Petris
NOT VOTING:  Beverly, Boatwright, Craven, Dills, Greene,  
  Polanco, Solis

 Specifics of SB 1993

1. States that the CEA can only become operational if three  
   key objectives are met:

    a.The Internal Revenue Service has determined that the  
      CEA    is tax exempt;

    b.70% (not 75%) of insurers join the CEA; and

    c.CEA has obtained 200% of the total reinsurance  
      capital contribution committed (a $1.4 billion  
      minimum).

   AB 2086 contains a similar provision in statute (SB 1993  
   is intent language).

2. Requires that CEA policyholders be provided with a  
   disclosure form outlining the limitations of the CEA  
   earthquake policy to CEA policyholders.

3. Specifies that the definition of "available capital"  
   relative to CEA includes all interest or other income  
   from the investment of money held in the CEA Fund.

4. Changes the definition of basic residential earthquake  
   insurance.

   SB 1993 increases the amount of additional living  
   expenses from $1,500 to $2,500 if after the first year  
   CEA has $700 million in available capital.  If after the  
   second year, CEA maintains $700 million, then the  
   additional living expenses will again increase from  
   $2,500 to $3,000.

5. Defines "nonparticipating insurer" as an insurer that  
   elects not to transfer or place any residential  
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                                                     SB 1993
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   earthquake policies in CEA.  Defines "participating  
   insurer" as an insurer that has elected to join CEA.

6. Specifies that CEA is to have the same duties to its  
   insureds that a private insurer currently has to its  
   insureds.  CEA is also to have the same liabilities to  
   its insureds as an insurer has to its insureds.  This  
   ensures that CEA policyholders have all of the legal  
   safeguards that private insurance polichholders  
   currently maintain.

7. Specifies that the operating expenses of CEA are to be  
   capped at not more than 3% of the premium income  
   received by CEA.  Funds are to be available to pay any  
   advocacy fees awarded in a proceeding under Section  
   10089.11 of the Insurance Code.

8. Clarifies that all CEA rates be established in  
   accordance with Proposition 103.  This includes the  
   right for consumers to intervene in both rate filings  
   and regulatory filings.

9. Specifies that the annual report to be submitted by CEA  
   to the Legislature include a description of all rates  
   and rating plans approved for use in CEA.  It is also to  
   include a statement of the current property assets,  
   liabilities, income, expenditures and reinsurance costs  
   to CEA.

   It also requires in the annual report a separate,  
   summary report on the financial capacity of CEA to pay  
   claims made against CEA.  It requires a statement of the  
   available capital, liabilities, pending surcharge  
   assessments and other basic issues fundamental to the  
   operation of CEA.

   Copies of the report are to be made available to the  
   public.

10.Makes CEA subject to the Political Reform Act.

11.Declares that CEA is a public instrumentality of the  
   state, exercising an essential state function.

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   Prohibits CEA from becoming a debtor under the  United  
   States bankruptcy laws and provides that claims against  
   the authority are to be governed under existing  
   provisions of the Government Code.

12.Continuously appropriates funds in the CEA Fund  for the  
   purposes of the authority.

13.Makes several changes to the financial structure of   
   CEA.  It maintains the present basic $10.5 billion  
   financial structure.

   The bill increases the time period and the amount of  
   insurer liability for payment of losses associated  with  
   claims made from CEA.  It does this by allowing for the  
   reallocation of the first layer of insurer contingent  
   liability ($3 billion) should the available cash on hand  
   grow in excess to $1 billion.  If this occurs, these  
   monies will transfer an insurer's contingent liability  
   to the very top layer of CEA liability.  If CEA has $4  
   billion of available cash on hand, this new top layer  
   will roll off in year 12.

   The author's office provides the following information   
   on what they refer as "roll-up" to the above process  
   works:

   "The first roll-up may not occur until the first  
   December 31st after CEA has been in operation for two  
   years.  Any roll-up would be limited to 15% of the  
   aggregate to $450 million).  Further, any roll-up in any  
   year must be backed by a dollar-for dollar buildup in  
   the available capital of CEA.  So, the roll-up can occur  
   only to the extent the CEA builds additional available  
   capital.  Thus, for example, if CEA accumulated $1.45  
   billion by the end of its third year, it could roll-up  
   $450 million.  In order for another roll-up to occur,  
   CEA would have to build up additional available capital  
   in excess of $1.45 and would occur dollar-for-dollar for  
   those sums in excess of $1.45 billion (subject to a $450  
   million cap).  And if, in that example, an earthquake  
   occurs which reduces the available capital after a  
   rollup, the CEA would have to build up to $1.45 billion  
   again and beyond before any more of the assessment  
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                                                     SB 1993
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   liability can rolled up.

   The purpose of the above is to keep insurers on the hook  
   for a greater amount of money and for a longer time  
   period than AB 13.  This also creates the ability for  
   the CEA to insure a $17 billion earthquake within a  
   10-year time period.

   The bill also increases the dollar amount of  
   recapitalization that is provided for in the event that  
   CEA pays claims for an earthquake and is in need of  
   being recapitalized.  Current law states that  
   recapitalization will be $200 million.  SB 1993  
   increases this amount by  $150 million to a total of  
   $350 million.  This will ensure that CEA can get started  
   off on a better footing following  moderate to major  
   earthquakes.

   Policyholders cannot be assessed to recapitalize CEA.

14.Maintains in place the fact that insurers who choose not  
   to participate in CEA is to be subject to earthquake   
   policyholder assessments under the California Insurance  
   Guaranty Association.

15.Requires an insurer that withdraws from the CEA under  
   certain circumstances to impose a premium surcharge on  
   earthquake policies to be used by the CEA to repay debt.

16.Provides that if legislation is enacted that causes CEA  
   to cease operations while debt of the CEA is  
   outstanding, participating insurers would be required to  
   impose a premium surcharge on earthquake policies to be  
   used by the authority to repay debt.

17.Provides for a $1.3 million loan to the CEA from the  
   California Residential Earthquake Recovery Fund in order  
   to implement the bill.  The loan is to be repaid within  
   the first 12 months of operation of CEA with interest  
   due at the legal rate on the  outstanding balance.

18.Specifies that the provisions of the bill are severable.

19.Becomes operative only if AB 2086 is enacted.
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 FISCAL EFFECT:   Appropriation:  Yes   Fiscal Com.:  Yes    
Local:  No

Provides for a $1.3 million loan to CEA.  Undetermined cost  
to the state General Fund from the loss of revenue due to  
                                                                    exemption of CEA policies from the Gross Premium Tax.

 SUPPORT:  (Verified  7/8/96)

Coalition For a California Earthquake Authority
  The Coalition includes the following groups:

  California Chamber of Commerce
  California Business Roundtable
  League of California Cities
  California State Council of Laborers
  California Manufacturers Association
  California Apartment Association
  Association of Bay Area Governments
  California Building Industry Association
  California State Firefighters' Association
  California Mortgage Bankers Association
  California Fire Chiefs Association
  Building Industry Association of Central California
  California Land Title Association
  Long Beach Chamber of Commerce
  Fire District Associations of California
  California Bankers Association
  Associated Builders and Contractors
  California Escrow Association
  Personal Insurance Federation of California
  California Association of Mortgage Bankers, Inc.
  Insurance Brokers and Agents of the West
  Roofing Contractors Association of California
  California Association of Life Underwriters
  Farmers Insurance Group
  California Plumbing and Mechanical Contractors  
Association
  National Association of Independent Insurers
  State Farm Insurance Cos.
  California Association of Realtors 
  Alliance of American Insurers
  Newhall Land and Farming Company
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  Insurance Agents and Brokers Legislative Council
  California Business Properties Association
  Automobile Club of Southern California  
  Freddie Mac
  Various cities, local chamber of commerces' and local  
building industries' 
      associations
California Seismic Safety Commission 

 OPPOSITION:  (Verified  7/8/96)

Consumers Union
Prop 103 Enforcement Project
Consumers Attorneys of California   
United Policyholders 

 ARGUMENTS IN SUPPORT:    The author's office states, CEA  
will be a public instrumentality, financed by up to $1  
billion but with at least $700 million in private capital  
contributions from participating insurers.  (The smaller  
number and numbers reflect a CEA with 70% participation  
from all insurers; the larger number and numbers reflect  
100% participation.  As the percent- age of participation  
grows, premium income, capacity, and exposure will grow  
proportionately.)  CEA will be backed up by at least $3.5  
billion to $5 billion of additional contributions from  
insurers, and at least $1.4 billion to $2 billion of  
reinsurance (and potentially more), up to a maximum of $1  
billion in policyholder assessments and up to $1.5 billion  
in private capital investments.  Assuming 100%  
participation, CEA will have a startup capacity of $10.5  
billion.  Assuming no losses, CEA will have a capacity of  
around $17  billion in its 10th year of operation.

The Personal Insurance Federation indicates that CEA is  
financially sound and provides a solid financial framework  
to ensure that consumers will have better benefits  
following the next earthquake.  CEA provides the quickest  
means available to accumulate capital to pay for  
earthquakes. Because it is exempt from federal taxes, CEA  
is able to keep any  unclaimed dollars.  It will open the  
homeowners and earthquake insurance market for consumers  
without requiring delinking.  It provides incentives for  
smaller insurers to enter the California homeowners  
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marketplace which current marketplace has yet to provide.   
They state CEA will provide  consumers with more options  
and more affordable prices.  The state has no liability for  
CEA claims and consumers who voluntarily join the CEA can  
only be assessed one time.

They concur with the urgency statements found in both AB  
2086 and SB 1993 that their enactment will promote the  
restoration of affordable and available homeowners  
insurance for all Californians, provide protection from the  
devastating and catastrophic losses caused by earthquakes,  
and continue California's economic growth.  They believe  
that both measures will serve to allow all their member  
companies who choose to participate in the CEA to increase  
the sale of homeowners insurance throughout California.   
This is important not only to the insurers and agents, but  
to consumers who are currently left with very few options  
in purchasing homeowners insurance.

They believe that both measures create a workable and  
balanced California Earthquake Authority.  SB 1993 provides  
increased coverage to consumers and places additional  
liability on participating carriers in the event of losses  
following a major earthquake within the first 12 years of  
the CEA's operation.  AB 2086 increases the liability that  
insurers have in settling claims and provides other  
additional protections and safeguards to consumers that  
were not originally contemplated in either of the  original  
CEA measures (AB13 and Preprint 5).

The Seismic Safety Commission, since 1990, has encouraged  
the state to develop a prefunded, tax-exempt,  
state-sponsored earthquake insurance program that would  
provide protections to homeowners and the insurance  
industry from losses resulting from earthquakes.

The Seismic Safety Commission states that it understands  
that the main thrust behind the bill is to alleviate the  
restrictions placed upon the homeowners insurance market,  
and the implications thereof, as a result of the mandate to  
offer earthquake insurance with each homeowners policy  
sold.  In the Commission's view, the Legislature response  
has been a positive one.  The proposal maintains the  
general public's ability to protect themselves from losses  
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resulting from earthquakes, spreads the risk of future  
losses amongst various parties to prevent the over-exposure  
of any particular group, establishes a prefunded program  
that upon creation should be able to handle the insured  
losses of a major earthquake in California, and finally,  
should speed economic recovery after such an event.

 ARGUMENTS IN OPPOSITION:    Consumers Union states "as  
drafted the proposed conference report would seriously harm  
consumers.  They state under normal circumstances, when  
homeowners buy an insurance policy, they pay the stated  
premium and in return receive the agreed-upon payment for  
their losses.  That's what insurance is: a premium in  
exchange for coverage and payment for losses.  The CEA  
contained in the report, however, would have consumers buy  
an insurance policy which notifies them in bold-faced,  
14-point type that any claims filed may not be paid in full  
due to inadequate funds in the CEA. Even if the claim is  
not fully paid or even if the CEA policyholder did not file  
a claim. they be assessed for more money if the CEA funds  
fall short.  What the notice does not divulge is that the  
assessment may continue for an indefinite number of years.   
Although the report places an absolute cap on the amount of  
contributions to the CEA that may be required from  
insurance companies, it places no cap on potential  
surcharges on consumers.

Furthermore, in the event of inadequate funding in the CEA,  
which is a real likelihood, assessments on consumers may be  
imposed before insurers and perhaps even before reinsurance  
is tapped.  The fact that the CEA has to warn homeowners  
that they may not receive payment and that they may face  
assessments is clear evidence that the CEA is  
under-capitalized."

Consumer Attorneys of California indicate the bills will  
weaken the program and subject homeowners and claimants to  
additional risk.   They believe that repealing the language  
deeming CEA as an insurer will lead to additional  
litigation, causing unnecessary expense and delay in  
resolving disputes involving CEA policies.  They believe  
that the program will harm California's homeowners if there  
is a significant delay in reinstating the mandate to offer  
earthquake insurance following financial failure of CEA.   
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Delaying relinkage would have one-half or more of the  
program's policyholders without any earthquake insurance  
for at least one year, subjecting them to great financial  
risk and jeopardizing the status of their home loan.

They also state that the new category of associate member  
could join CEA without any initial capital contribution,  
and could even be provided with unspecified incentives.   
Adding exposure from these associate members, without any  
initial capital contribution to back up this risk, will  
increase the risk of  financial failure of CEA, and make it  
much more likely that policyholders will be assessed to  
help pay for their own claim cost.

Lastly, they state, "it has been claimed that failure to  
adopt this program would  precipitate a crisis in the  
homeowners  insurance field.  However, it is their  
understanding that a number of insurers are actively  
writing new business--including the non-renewal 20th  
Century policyholders--throughout the state.  Furthermore,  
individual efforts by insurers, such as the innovative  
reinsurance program undertaken by the Farmers Group or the  
realignment strategy employed by the Allstate Group, are  
helping these companies meet their financial  obligations  
without the need for a massive bail-out such as the CEA.   
With the major break given the industry last year by  
adoption of the mini-policy, insurers' exposure to earth-  
quake losses was cut in half.  With these other actions,  
the industry is taking necessary steps to protect itself  
without shifting unreasonable risk onto policyholders.

United Policyholders indicate the only long term solution  
is to restore free competition to the California homeowners  
and earth- quake markets.  They state there is no reason to  
create a huge state bureaucracy to bail out three insurance  
carriers (State Farm, Farmers, and Allstate) in order to  
sell a product that can and should be sold in the private  
market place.  Insurance carriers have asked for  
"de-linkage" in order to restore competition to the market  
place.  This proposal, de-linkage plus an Earthquake FAIR  
Plan will achieve that result but also guarantee that every  
consumer that wants an earthquake can get one.

 ASSEMBLY FLOOR:
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AYES:  Ackerman, Aguiar, Alby, Baca, Baldwin, Battin,  
  Baugh, Boland, Bordonaro, Bowler, Brewer, Brulte,  
  Bustamante, Cannella, Conroy, Cortese, Cunneen, Figueroa,  
  Firestone, Frusetta, Goldsmith, Granlund, Hannigan,  
  Harvey, Hauser, Hawkins, Hoge, House, Kaloogian, Knight,  
  Kuehl, Kuykendall, Machado, Margett, Mazzoni, McPherson,  
  Miller, Morrissey, Morrow, Olberg, Poochigian, Rainey,  
  Richter, Rogan, Setencich, Takasugi, Thompson, Tucker,  
  Weggeland, Woods, Pringle
NOES:  Archie-Hudson, Bates, Burton, Caldera, Davis,  
  Ducheny, Escutia, Friedman, Gallegos, Isenberg, Katz,  
  Knox, Lee, Martinez, Migden, K. Murray, W. Murray,  
  Napolitano, Speier, Sweeney, Vasconcellos, Villaraigosa
NOT VOTING:  Alpert, Bowen, Brown, Campbell, Knowles

DLW:lm  7/10/96  Senate Floor Analyses
              SUPPORT/OPPOSITION:  NONE RECEIVED
                      ****  END  ****


























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